Personal property subject to taxation in many states is taxed at the municipal level, while being regulated by state statute and administered by a state's executive branch. Revenues are typically kept by the taxing municipality, and contribute to the support of their annual budget.
Most commonly, all personal property is subject to taxation, unless specifically exempted by state statute, and qualifying taxable property is often owned by commercial entities. Therefore, a municipal taxing authority deals with predominately businesses and commercial interests.
Taxable personal property must typically be reported on an annual basis to the respective municipal tax assessor. The reporting document is commonly referred to as a Personal Property Declaration, and this term “Personal Property Declaration” (PPD) will be used here as a broad term to cover such documents.
In order to ensure accuracy m submitted PPDs, statutory authority provides broad powers to the (municipal) tax assessor and certain qualified others acting on behalf of the assessor. Audits of PPDs are typically time-restricted, in that they are limited to a specified number of years (e.g. the current and previous two years).
Heretofore, a municipality has typically had only two options available in order to track down unreported taxable assets: (1) employ personnel to audit selected filers, or (2) outsource to a private company. Interestingly, neither of the aforementioned methods have had much of a long-term impact on “compliance,” which is defined here as an accurate reporting of all taxable assets. One possible reason for this situation is that neither of these two options involves “compliance” as a specific goal, and neither has employed a process which is designed to achieve it over the long term. Instead, these two options are typically driven by short-term revenue goals only.
A method for improving accuracy of PPDs is needed that establishes “compliance” as the primary goal. If the long-term goal is not directed towards increased “compliance” in annual filings, then the program will result in lower efficiency and effectiveness in collecting potential tax revenue.
It is a generally accepted fact that a significant percentage of PPDs filed with the local assessor's office each year contain inaccurate information, usually in the form of under-reported taxable assets. In addition, many filers fail to include the required information on leased property, even though this information is needed to reconcile with the property owner's filing. Moreover, some people who are legally obligated to file do not bother to file at all.
There are a number of reasons to account for these shortcomings in filed PPDs, ranging from clerical error to intentional misrepresentation. Generally, the accuracy of these reports has suffered from the inattention given them by the taxing authority. Internal staff shortages and antiquated computer systems, as well as ineffective outsourcing programs, have severely limited the ability of municipal assessors to correct the situation.
Further contributing to the problem is the fact that many errors relate to structural problems such as the taxpayer's fiscal year being out of phase with the October 1 day of record, for taxable personal property. Additional error can arise from the fact that the expense/depreciation rules for federal tax purposes differ from Personal Property Declaration schedules.
Regardless of the reason, attempts to raise compliance through manual audits have proven ineffective. Outsourcing to service companies that use typical prior art audit methodology may enhance revenue, but accomplish little for “compliance.” A new approach is needed to provide the catalyst for compliance. Former methods have failed and, in some cases, have had costly outcomes resulting from court actions taken by the taxpayer. All of the former programs were revenue-driven, with “compliance” given only passing attention.